2 Years After FTX Collapse Trust and Confidence Are More Important Than Ever

• FTX’s collapse eroded trust in crypto, leading to widespread skepticism.
• Global regulators are stepping up with frameworks like the EU’s MiCA to bring oversight to crypto.
• Building long-term trust in crypto requires firms to prioritize security, transparency, and compliance.

It’s been just over two years since FTX filed for Chapter 11 bankruptcy, an event that profoundly impacted the crypto landscape.

The exchange, widely lauded as a model for bringing digital assets into the mainstream, left the world in shock after it emerged that millions of dollars in FTT was being used to prop up crypto hedge fund Alameda Research.

The resulting bank run revealed an unprecedented scale of fraudulent activity. It cemented the reputation of FTX’s Founder, Sam Bankman-Fried – a man once pictured on the same stage as Tony Blair and Bill Clinton – as one of the greatest conmen in US history.

Two years on, the scandal’s repercussions continue to influence perceptions of the crypto industry and show why today, trust and confidence remain more essential than ever.

How FTX left Trust in Tatters

The immediate effect of FTX’s collapse was a massive erosion of trust and a surge of skepticism towards the crypto sector.

One in five consumers became more cynical towards the crypto market following the FTX scandal, with a huge 40% associating the industry with criminality and fraud.

It wasn’t just FTX that suffered. The collapse had knock-on effects for firms like BlockFi, which also plunged into liquidity crises and bankruptcy, creating a perception of crypto as a high-risk sector with insufficient protections.

FTX’s downfall underscored a troubling lack of transparency and, for many, was a frightening alarm that even the largest crypto firms could falter.

A Regulatory Balancing Act

In the wake of the FTX scandal, regulators worldwide have stepped up their efforts to create frameworks to bring greater oversight and transparency to crypto.

The EU has taken the lead in this transition with the Markets in Crypto Assets (MiCA) regulation, one of the most comprehensive regulatory frameworks for digital assets.

Asia-Pacific jurisdictions like Singapore and emerging Middle Eastern hubs like Dubai have also been early movers in bringing regulatory clarity to cryptocurrencies.

Effective regulation targets specific areas – such as anti-money laundering protocols, capital reserve requirements, and third-party risk assessments of crypto companies – without applying blanket restrictions that stifle the growth of the crypto market.

For instance, requiring exchanges to demonstrate proof of reserves, undergo regular audits, and implement adequate safeguards to protect the security of clients’ assets can improve governance without hindering their ability to grow and launch new services.

A targeted and proportionate approach will allow regulators to address the most significant risks while fostering an innovative crypto ecosystem.

Building Long-Term Trust and Confidence

Regulation, however, isn’t a silver bullet. Trust is the foundation for the adoption of any emerging financial technology.

Beyond regulatory mandates, crypto firms have a responsibility to proactively provide evidence to investors that their funds are safe and secure.

Given crypto’s decentralized and global nature, where crypto firms operate in geographies without clearly defined crypto regulations.

The onus is on them to behave as if they’re regulated, adopting traditional finance’s best practices around governance and risk management.

Building long-term confidence requires a cultural shift within the industry. Rather than an operational overhead, crypto firms should view investing in fraud prevention, compliance, and security as a competitive differentiator.

Companies that demonstrate a commitment to these standards will be better positioned to gain the trust of more cautious, risk-aware users – the next wave of new entrants to the market, vital to its growth.

Despite the challenges, crypto’s short 15-year history is still impressive, with exceptional growth and a rapidly maturing sector.

The demand for digital assets is increasingly strong, and the number of people holding cryptocurrency globally is set to reach 1 billion  by 2030.

However, traditional finance’s stability and degree of regulatory oversight didn’t happen overnight or by chance.

Enhancing Crypto’s Credibility

Crypto’s role in facilitating cross-border payments and better financial inclusion is gaining traction and boosting the asset class’s popularity with investors.

A third of consumers in the U.K. and U.S. are either likely or extremely likely to invest in crypto.

To secure its future as a credible alternative to traditional finance, the crypto industry must learn from the FTX scandal and adopt measures to protect its users and investors.

A similarly sophisticated regulatory approach will play a key role in protecting crypto investors but is not a panacea.

In parallel, crypto firms must proactively foster greater transparency and responsible risk management practices and security measures.

Above all else, the collapse of FTX was a story dominated by a lack of integrity and governance, which crypto firms must address to lay the foundation for sustainable growth.

If these elements become engrained in the crypto landscape, adoption will surge in the years ahead.